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Business Finance Info & Updates

How to make Banker’s Acceptance on trade finance successful

A Banker’s Acceptance (BA) is a draft drawn on and accepted by a bank, unconditionally ordering payment of a certain sum of money at a specified time in the future to the order of a designated party. 

Since the instrument is negotiable, title to it is transferred by endorsement. It is a marketable instrument and allows a bank to finance its customers without necessarily utilising its loanable funds. Instead, funds are provided by investors who are willing to purchase these obligations on a discounted basis.

Last week, the Central Bank of Nigeria (CBN) rolled out guidelines on the issuance and treatment of Bankers Acceptances. The apex bank states that the “sale” or “purchase” of services shall not be eligible for BA financing unless otherwise specifically provided for or approved by the CBN. So also it orders banks not to accept a BA drawn to finance a sale or purchase of goods for some reasons.

The apex bank explains that the guideline is to ensure uniform practice and correct treatment of Bankers Acceptances (BAs) and Commercial Papers (CPs) by banks and Discount Houses in the country. “It has become imperative to issue these guidelines, to deepen and facilitate the effective and efficient functioning of the Nigerian money market,” it states.

Conditions for creating banker’s acceptance 

•Every BA shall have an underlying trade transaction for which the bank should hold the title documents to the merchandise as collateral for the acceptance. These documents shall be available for Examiners’ scrutiny.

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•A BA shall be represented by a physical instrument in the form of a draft signed by the drawer and accepted by the bank. All BAs shall be properly executed by the bank by affixing its ‘ACCEPTED’ stamp, signature and date on the face of the bill. These shall be made available for the Examiners’ scrutiny.

The bank shall have a signed agreement, for each acceptance it creates, with the drawer.

•Subject to these Guidelines, a BA may only be drawn on and accepted by a bank, pursuant to an acceptance credit line, to finance the drawer’s business-related activity in relation to the purchases from or sale of goods to another person who may be a resident or non-resident, evidenced by proper and adequate documentation.

•Unless otherwise specifically provided for in these Guidelines or approved by the CBN, the “sale” or “purchase” of services shall not be eligible for BA financing.

•A bank shall not accept a BA that is drawn to finance a sale or purchase of goods, where:

•The two parties to the trade transaction are part of a single legal entity (e.g. Production Department and Marketing Department of one company or one branch and another branch);

•The two transacting parties are sole proprietorships operated or owned by the same individual or where the proprietors are different individuals related to each other (parent/child or spouse); or

•The two transacting parties are partnerships in which the partners are the same individuals, or the majority of the partners are common, or one or more common partners own the majority share in the partnerships.

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•Where the two transacting parties are related corporations, a BA may still be drawn provided that the accepting bank shall take reasonable measures to verify that:

•The related corporations are indeed separate legal entities;

•The trade transaction between the two related corporations was undertaken at arm’s length and there was a genuine transfer of title to the goods concerned, evidenced by proper and adequate documentation.

•The transaction is to finance cross border trade.

Extension of BA tenure or creation of new BA to repay the financing created by existing BA using the same commercial and/or financial documents is not allowed.

•In the event that funds collected from investors are not disbursed to the issuer immediately, such funds shall be treated as deposits.

(x) A BA shall be executed before canvassing for funds from potential investors. Investors in BAs shall also be made aware of the identity of the issuer.

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